We use cookies to understand how you use our site and to improve your experience.
This includes personalizing content and advertising.
By pressing "Accept All" or closing out of this banner, you consent to the use of all cookies and similar technologies and the sharing of information they collect with third parties.
You can reject marketing cookies by pressing "Deny Optional," but we still use essential, performance, and functional cookies.
In addition, whether you "Accept All," Deny Optional," click the X or otherwise continue to use the site, you accept our Privacy Policy and Terms of Service, revised from time to time.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Amazon's AI Bet Is Paying Off in Revenues: Why Isn't FCF Following?
Read MoreHide Full Article
Key Takeaways
AWS revenues rose 37% to $42.2B in Q2 as AI services and custom chips each topped $25B run rates.
Amazon's TTM free cash flow swung to a $7.6B outflow as capex climbed to $169B.
Amazon's TTM ROIC is 12.4%, above its 10-year median, while debt nearly doubled in two quarters.
Amazon (AMZN - Free Report) posted its fastest AWS (Amazon Web Services) growth in 18 quarters in the second quarter of 2026. Revenues jumped 37% year over year to $42.2 billion, with segment operating income surging 64% and margin expanding to 39.4% from 32.9%. That's strong evidence that the company's massive AI infrastructure spending is generating real demand. Yet over the same trailing 12 months (TTM), free cash flow (FCF) swung negative.
The gap comes down to timing. Revenues are benefiting from capacity already in use, while FCF is absorbing the cost of capacity Amazon is still building. The question is whether that new capacity can generate enough revenues and cash flow to justify the investment.
The AI Revenue Base Is Getting Bigger
AWS' AI-services business has surpassed a $25 billion annualized revenue run rate, growing at a triple-digit percentage rate year over year. Its custom-chip business— comprising Trainium for AI training and inference and Graviton for general cloud computing— has also crossed a $25 billion run-rate threshold, growing at triple digits.
AWS as a whole is now operating at a $169 billion annualized revenue rate. So, Amazon isn't building AI capacity without a visible revenue base.
The tension shows up not in whether the business is growing, but in how the cash statement is currently keeping score.
AMZN’s Operating Cash Flow Isn't the Problem
Let’s look at the cash flow conversion metric. It measures how much of reported earnings actually becomes real operating cash. According to our proprietary calculations, Amazon's TTM cash flow conversion is 119.3%— meaning operating cash flow is still comfortably outrunning net income. That's a healthy number in absolute terms, even though it sits a little below Amazon's own 126.9% TTM median.
Operating cash flow for the trailing 12 months increased to $161.4 billion compared with $121.1 billion in the prior-year period.
So, the core business is converting profit into cash just as well. The problem shows up one step further down the cash flow statement.
The Lagging Indicator: FCF Conversion
FCF conversion measures what's left over after a company reinvests in itself. Our proprietary calculations show that Amazon's TTM FCF conversion is -5.6% versus a -3.1% TTM median. Free cash flow for the trailing 12 months swung to an outflow of $7.6 billion compared with an inflow of $18.2 billion a year earlier, driven by a $66.1 billion year-over-year increase in net property and equipment purchases tied to AI infrastructure investment.
In the second quarter alone, capex hit $54.2 billion, up from $32.2 billion a year earlier, and the trailing-12-month total climbed to $169 billion from $103 billion. Management has guided roughly $220 billion in cash capex for 2026.
The FCF pressure should ease as new data centers actually come online and start generating revenues. Until that happens, Amazon is spending more on infrastructure than its current cash generation can cover, and free cash flow is absorbing the difference.
Most hyperscalers are spending big to capture the growing AI opportunity. For instance, Alphabet (GOOGL - Free Report) lifted its 2026 capex target to $195-$205 billion and expects spending to increase significantly again in 2027. Microsoft (MSFT - Free Report) expects roughly $175 billion in fiscal 2027 capex, underscoring that this is an industry-wide arms race.
Debt Is Filling the Gap
With FCF negative, Amazon is relying on debt to help fund the buildout. Long-term debt was $128.9 billion at the end of the second quarter of 2026, essentially double the $65.6 billion Amazon carried just two quarters earlier, reflecting roughly $67 billion in new borrowing in the first half of the year alone.
Is the Capital Actually Working? What ROIC Says
Amazon's TTM ROIC (Return on Invested Capital) is 12.4%, above its own 10-year median of 11.5%. In other words, even while the company pours unprecedented sums into new infrastructure, it's still earning returns on its total capital base that are consistent with or even slightly better than its own long-term track record.
Image Source: Zacks Investment Research
Management says server and networking investments typically break even in under three years, while much of the current AI capacity is already contracted for five years or more. If that demand converts as planned, both FCF and ROIC should improve together as the new capacity starts earning revenues instead of just consuming cash.
How Quickly Will the FCF Catch Up?
Amazon's AI investment is already translating into strong AWS and AI-related revenue growth, while operating cash flow remains healthy. But the scale of new capex is currently large enough to push FCF into negative territory and requires more debt financing.
If AWS growth remains strong and new capacity is monetized as expected— with ROIC already holding above its long-term average— today's FCF pressure could ease. The key is how quickly that revenue growth translates into cash flow and closes the gap created by today's heavy investment.
View the Zacks #1 Rank List
Image: Bigstock
Amazon's AI Bet Is Paying Off in Revenues: Why Isn't FCF Following?
Key Takeaways
Amazon (AMZN - Free Report) posted its fastest AWS (Amazon Web Services) growth in 18 quarters in the second quarter of 2026. Revenues jumped 37% year over year to $42.2 billion, with segment operating income surging 64% and margin expanding to 39.4% from 32.9%. That's strong evidence that the company's massive AI infrastructure spending is generating real demand. Yet over the same trailing 12 months (TTM), free cash flow (FCF) swung negative.
The gap comes down to timing. Revenues are benefiting from capacity already in use, while FCF is absorbing the cost of capacity Amazon is still building. The question is whether that new capacity can generate enough revenues and cash flow to justify the investment.
The AI Revenue Base Is Getting Bigger
AWS' AI-services business has surpassed a $25 billion annualized revenue run rate, growing at a triple-digit percentage rate year over year. Its custom-chip business— comprising Trainium for AI training and inference and Graviton for general cloud computing— has also crossed a $25 billion run-rate threshold, growing at triple digits.
AWS as a whole is now operating at a $169 billion annualized revenue rate. So, Amazon isn't building AI capacity without a visible revenue base.
The tension shows up not in whether the business is growing, but in how the cash statement is currently keeping score.
AMZN’s Operating Cash Flow Isn't the Problem
Let’s look at the cash flow conversion metric. It measures how much of reported earnings actually becomes real operating cash. According to our proprietary calculations, Amazon's TTM cash flow conversion is 119.3%— meaning operating cash flow is still comfortably outrunning net income. That's a healthy number in absolute terms, even though it sits a little below Amazon's own 126.9% TTM median.
Operating cash flow for the trailing 12 months increased to $161.4 billion compared with $121.1 billion in the prior-year period.
So, the core business is converting profit into cash just as well. The problem shows up one step further down the cash flow statement.
The Lagging Indicator: FCF Conversion
FCF conversion measures what's left over after a company reinvests in itself. Our proprietary calculations show that Amazon's TTM FCF conversion is -5.6% versus a -3.1% TTM median. Free cash flow for the trailing 12 months swung to an outflow of $7.6 billion compared with an inflow of $18.2 billion a year earlier, driven by a $66.1 billion year-over-year increase in net property and equipment purchases tied to AI infrastructure investment.
In the second quarter alone, capex hit $54.2 billion, up from $32.2 billion a year earlier, and the trailing-12-month total climbed to $169 billion from $103 billion. Management has guided roughly $220 billion in cash capex for 2026.
The FCF pressure should ease as new data centers actually come online and start generating revenues. Until that happens, Amazon is spending more on infrastructure than its current cash generation can cover, and free cash flow is absorbing the difference.
Most hyperscalers are spending big to capture the growing AI opportunity. For instance, Alphabet (GOOGL - Free Report) lifted its 2026 capex target to $195-$205 billion and expects spending to increase significantly again in 2027. Microsoft (MSFT - Free Report) expects roughly $175 billion in fiscal 2027 capex, underscoring that this is an industry-wide arms race.
Debt Is Filling the Gap
With FCF negative, Amazon is relying on debt to help fund the buildout. Long-term debt was $128.9 billion at the end of the second quarter of 2026, essentially double the $65.6 billion Amazon carried just two quarters earlier, reflecting roughly $67 billion in new borrowing in the first half of the year alone.
Is the Capital Actually Working? What ROIC Says
Amazon's TTM ROIC (Return on Invested Capital) is 12.4%, above its own 10-year median of 11.5%. In other words, even while the company pours unprecedented sums into new infrastructure, it's still earning returns on its total capital base that are consistent with or even slightly better than its own long-term track record.
Image Source: Zacks Investment Research
Management says server and networking investments typically break even in under three years, while much of the current AI capacity is already contracted for five years or more. If that demand converts as planned, both FCF and ROIC should improve together as the new capacity starts earning revenues instead of just consuming cash.
How Quickly Will the FCF Catch Up?
Amazon's AI investment is already translating into strong AWS and AI-related revenue growth, while operating cash flow remains healthy. But the scale of new capex is currently large enough to push FCF into negative territory and requires more debt financing.
If AWS growth remains strong and new capacity is monetized as expected— with ROIC already holding above its long-term average— today's FCF pressure could ease. The key is how quickly that revenue growth translates into cash flow and closes the gap created by today's heavy investment.
Amazon stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.